Somaxon is a specialty pharmaceutical company located in San Diego, CA.  A specialty company is one that often doesn’t engage in research itself but licenses in drugs discovered by others, develops them, then either partners with other companies or markets the drug itself.  Such drugs tend not to be as profitable as novel therapies, new chemical entities described in the glossary, as the market is often smaller.  The market is smaller because the more profitable indications for the active ingredient has been exploited by other companies.

Somaxon developed a drug that it called Silenor to be used for those suffering from insomnia.  There are other existing therapies for insomnia, so since Silenor isn’t a first-in-class therapy, it is unlikely to be a blockbuster drug.  Nevertheless, some specialty companies are able to develop a specialty pharmaceutical drug into a few hundred million dollars in revenue: both respectable and profitable.

The active ingredient in Silenor is doxepin, an active ingredient discovered by Boehringer, which is now part of Roche; the drug was approved for various psychiatric conditions about forty years ago.  It has been off-patent for some time.

Somaxon has had an interesting history in its efforts to secure marketing approval for Silenor.  I’ll run through some of the significant events.  The company filed its New Drug Application almost 28 months ago on January 31, 2008.  The filing contained results on four phase III clinical trials for the drug.  On April 15, 2008, the FDA announced that it had accepted the filing and that the NDA was now under review.  The FDA reported that it would issue an action letter by December 1, 2008: the PDUFA date for Silenor: so far, so good.

On May 22, the company announced that it had secured $65 in financing: a $15 million loan and $50 million in newly issued equity.  This latter event would have a dilutive effect on existing shareholders.  On November 24, 2008, the company reported that the FDA would not complete the review of the NDA filing by the PDUFA date; the agency would need up to an additional three months to complete the process.  The FDA misses the PDUFA date in about 1 in 5 cases.  The company stated that the FDA did not request any additional information or raise any issues about the submission.

On February 26, 2009, Somaxon received a response letter from the FDA: the news was not good.  The FDA determined that based on the NDA, Silenor could not be approved.  The release indicated that the agency had reviewed the efficacy data and questioned the results.  Not surprisingly for a drug with a forty year history, no safety issues were raised.  On March 26, with the stock price down to forty cents or so, the company received notice from the NASDAQ about non-compliance with listing requirements.  On April 7, Somaxon reported on its meeting with the FDA to discuss the letter issued by the agency in February.  Somaxon announced that it would reanalyze the data obtained in the clinical trials and resubmit the results to the FDA.  This resubmission with the additional statistical analyses was announced on June 4.  On July 7, the company announced that the FDA accepted the resubmission; the company also announced it had raised an additional $6 million through the issuance of 5.1 million new shares of stock.

On December 7, 2009, almost a year after its original PDUFA date, the company received a complete response letter from the FDA.  Once again the news wasn’t good; the company reported that the NDA could not be accepted in its present form.  The company announced, once again, that it would meet with the FDA.  On January 21, 2010, the company reported a successful meeting with the FDA; the release indicated that all open issues had been addressed and that the FDA would accept a resubmission.  At this point, the stock traded at around $2.25 a share; the January 21 release contained very good news.

On March 18, 2010, Somaxon received marketing approval for Silenor and shares in the company jumped from around $4 to $10.  The real news actually occurred on January 21, when the company, essentially, reported that it had cleared up all open issues with the FDA.  It wasn’t exactly clear how it addressed the concerns raised about sleep maintenance efficacy in non-elderly adults with primary insomnia, but it was clear that the agency seemed happy with what the company proposed.

Specialty companies don’t always get a nice bounce in the value of its shares when an approval is announced.  Their drugs often don’t hold as much value as those from an innovator.  However, in this case, Somaxon had a number of false starts, which probably created uncertainty about the approval of Silenor.  The January 21 release contained very good news, but it wasn’t really reflected in the stock price.

It’s often difficult to decide if one should sell when there’s a run up after a drug approval.  In this case, however, Somaxon helped with the decision: four days after approval on March 22, the company announced that it was offering to sell an additional 4 million shares of stock.  At that point shares in the company were trading at around $9; however, in this situation, I think it was time to sell.  Often the share price of specialty companies slide after approval; this dilutive effect was going to almost guarantee that the stock couldn't remain at $10 a share, particularly since Silenor wasn't going to be anything close to a blockbuster drug.

Going forward, this company will be measured to an increasing extent on its ability to generate revenues and earnings.  The days of selling investors on future prospects are drawing to a close.